I was not planning on making another

video on covered calls, but my last two

videos started a lot of discussion that

I think is worth pursuing. There are a

ton of these products being launched in

Canada, and I believe people are making

serious errors in their assessments of

them. I feel a personal responsibility

to give some final comments. I think the

best way to approach this is to respond

to comments from my last video. I'll

address whether covered calls protect

you in a downturn, whether the new age

of covered call funds are better than

the old ones, whether I have any

integrity, and why I keep coming back to

this topic. I'm Ben Felix, chief

investment officer at PWL Capital, and

I'm going to tell you one last time why

covered calls are destructive to

long-term wealth, even if you need

income from your portfolio.

The financial product landscape has come

full circle. For decades, actively

managed mutual funds siphoned dollars

out of investor pockets and into the

financial industry without offering much

if anything in return. Eventually,

investors started to realize that paying

2% or more to own actively managed

mutual funds sold by commission

salespeople was a losers game. At first,

that led people toward lowcost index

funds slowly, which was a good thing.

But now, high fee products that look

different enough from traditional

actively managed mutual funds while

carrying many of the same issues are

being promoted by unlicensed financial

content creators. I have a lot of

sympathy for the people using these

products, being being sold on these

products. They're being sold hope.

They're being sold a better future, but

I don't think they understand the true

costs. I want to read you a quote that

has stuck with me since I read it a few

weeks ago. Capitalists respond to the

actual demand for their products, not

the demand that would exist if people

were perfectly rational and truly

understood their own best interests.

Since people's demands are driven by the

benefits they perceive rather than the

benefits they actually get, the

financial system supplies too many

products with exaggerated benefits and

too few products with underappreciated

benefits. And since perceived costs

rather than actual costs drive people's

demands, the financial system supplies

too many products with hidden costs. I

need you to think about that. It comes

from John Campbell's new book, Fixed.

Campbell's a professor at Harvard and

one of the top living financial

economists. He's basically saying that

capitalism doesn't work properly when

people don't know which products are

good for them or how much those products

cost. When it comes to covered call

funds, people seem to want them because

they are so psychologically attached to

income, even when the income comes in a

package that makes them worse off.

Overall, capitalists, the the fund

companies are more than happy to meet

this demand because they can launch

products that cater to investor biases

while charging a high fee for the

service. There's no money to be made in

lowcost index funds. So, it's not

surprising to see this shift. Something

I didn't appreciate when I started

making videos on covered calls is that

there is a whole cottage industry of

unlicensed financial content creators

promoting these products and in many

cases selling access to coaching

sessions or research to help you build

your covered call income portfolio.

Financial markets and financial advice

are regulated for a reason. Regulation

in Canada has not been perfect and our

long history of high fee actively

managed funds being sold on commission

is a blemish that will take decades to

recover from. But taking advice from

unregulated content creators with

limited financial background is risky

business. There's nothing inherently

wrong with selling options. Where I take

issue is with these products being

marketed and sold on their yields as if

the yields were returns when in reality

the yields are at best irrelevant and

more likely have a negative relationship

with expected returns. Okay, on to the

comments. Let's start with covered calls

in down markets. In my last video, I

showed five examples of covered call

funds underperforming their underlying

equities when monthly withdrawals are

held constant at the distribution yield

of the covered call fund. In those

examples, the investor in the covered

call fund and the underlying fund were

spending the same dollar amount at the

same time intervals. I did include the

2022 downturn in my previous examples.

Going back further, the Invesco S&P 500

buy ETF started in December 2007 just in

time for the great financial crisis. I

set up a similar side-by-side comparison

of the covered call fund and an S&P 500

index fund. Spending from both

portfolios in this simple model is

matched to the distributions of the

covered call fund. To be completely

clear, both sides of the comparison are

spending the same dollar amounts which

is based on the covered call funds

distributions. Keeping in mind that this

is one of the worst periods for the US

stock market in recorded history, we do

see that the covered call strategy is

helpful. It slightly reduces the

downside. However, the covered call fund

quickly falls behind as equities

recover. The option premiums from

selling calls are creating a bit of a

buffer when stocks are down. But writing

those options into an eventual recovery

is destructive to wealth because they

limit upside participation. Over the

full history of this fund, including the

great financial crisis, the COVID crash,

and the 2022 decline, and holding

spending constant for the covered call

fund and the underlying equity fund, an

investor in the underlying would have

3.8 8 times the amount of wealth as an

investor in the covered call strategy at

the end of September 2025. What is not

relevant here is whether or not you had

to sell shares in a down market to fund

your spending. This is a tough one to

grasp, but it's really important. Let's

look at JAPI as an example. I will walk

through this in excruciating detail. I'm

sorry and you're welcome. Let's step

back in time to May 2020. JP Morgan

launches the JP Morgan Equity Premium

Income ETF. You have a bit of extra

stimulus cash kicking around. So, you

buy $1 million of JAPI. I know that's a

ridiculous amount for stimulus cash, but

bear with me. That that's 20,000 shares

of JAPI at at the share price at that

time. You spend all the monthly

distributions from JAPI, but you don't

touch your 20,000 shares. Your neighbor

puts $1 million into IVV, the iShares

Core S&P 500 ETF on the same day. That

amounts to 3,355

shares of the ETF and a little bit of

cash left over. Your neighbor matches

all the spending that you're doing from

your JAPI distributions through a

combination of of IV's quarterly

dividends and selling off shares of IVV

each month. For example, your first

distribution from JAPI is $9,882

while your neighbor receives a $4,230

dividend and sells 17 shares of their

ETF to bring their total cash, their

total spending cash roughly in line with

yours. Fast forward to September 2022

and IVV is down a lot from its recent

peak. You receive an $11,178

dividend from JAPI while your neighbor

has to sell 28 shares at a depressed

price to match your spending. This seems

really bad for your neighbor, but what

happens next is important. Your neighbor

continues to sell IVV shares to fund

their spending, but the value of their

remaining shares is increasing faster

than they spent. You still have 20,000

shares of JAPI, but their value has

barely increased since you bought them.

Keep in mind that you and your neighbor

have spent the same dollar amount from

the portfolios. Covered calls were

successful in this example at avoiding

selling shares in a downturn, but they

also capped upside participation

significantly, resulting in less wealth

overall, holding spending constant. I

saw a lot of comments saying, "Well,

what if you sell your last shares to

fund your spending?" To which I would

ask, what if the value of your constant

number of shares declines to zero? Two

different ways to arrive at the same

outcome. It's the number of shares

multiplied by the price that matters.

Either one on its own contains very

limited information. As these examples

show, covered calls do offer some

protection in a falling market due to

the option premiums generated by selling

calls. But I can't tell you when the

market will fall or more importantly,

when it will recover. I get the appeal

of living off the income in a down

market. But when the cost of that income

is missing out on expected returns both

before and potentially more importantly

after a stock price decline, it is

increasing, not decreasing the risk of

your ability to pay your bills in the

future. Remember, covered calls look a

lot like holding a large portion of your

portfolio in cash. That can look good

over some periods when stocks perform

poorly, but in the long run, it is

expected to be very expensive. Another

interesting question is whether

reinvesting rather than spending the

distributions gives covered calls a

magical advantage in a market downturn.

As Andy suggests in a comment, as you

can see here, with dividends reinvested,

it does not make a difference to the

general story. Covered calls continue to

dramatically underperform when both

sides of the comparison are left to

accumulate and reinvest their

distributions. One of the mistakes I

think a lot of people are making with

these products is thinking, as Andy

suggests, that covered calls allow you

to spend more in retirement or retire

sooner with less savings. The only way

this is true is if there was no other

way, psychologically speaking, for you

to spend your own money. That aside,

covered calls result in lower, not

higher, sustainable spending for

long-term investors for the simple

reason that they reduce expected

returns. Addressing the questions about

when covered calls may or may not shine

was important. There were also a ton of

comments from people claiming that I

picked the wrong funds to analyze in my

previous videos. The interesting thing

to me is that most of the tickers that

people offered up as superior performers

and better representations of covered

call funds as a strategy have similarly

underperformed their underlying

equities. These repeated interactions

led me to believe with all due respect

to everyone watching that many investors

have no idea what their investment

returns actually are. And that is an

observation backed up by academic

research. People really don't know what

their returns are, which makes it hard

to make good decisions. Let's go through

all the examples that I was given. These

first ones are US-listed ETFs. SPYI, the

NEOS S&P 500 highinccome ETF, has

trailed the Vanguard 500 index fund by

4.61% annualized since August 2022. Not

off to a good start here. QQQI, the NEOS

NASDAQ 100 high-inccome ETF, has trailed

the Invesco NASDAQ 100 ETF by 2%

annualized since January 2024. Not as

bad. JPQ, the JP Morgan NASDAQ equity

premium income ETF, has trailed the

Invesco NASDAQ 100 ETF by an annualized

4.36% since May 2022. To its credit, in

the 2022 downturn, JAPQ did better than

its underlying, but any advantage was

short-lived as it gave up the upside in

the subsequent recovery. Okay, DIVO, the

Amplify CWP enhanced dividend income

ETF, if I have any integrity, I had to

put some effort into the underlying

comparison here since DIVO is not an

index fund. It holds a portfolio of

highquality dividend oriented stocks.

So, it doesn't make sense to compare it

to, say, an S&P 500 ETF. I compared it

to the Vanguard Dividend Appreciation

Index Fund ETF. They have moderate

holdings overlap and a very high return

correlation. So, I think it's a

reasonable comparison. DIVO has

underperformed by an annualized 51 basis

points since December 2016. I know I

said an S&P 500 comparison made no sense

here, but DIVO has performed far worse

against that benchmark for whatever

that's worth. QQQI we did earlier.

Another underperformer. At least I still

have my integrity. Ah, okay. Income and

growth. Let's take a look. Hyld is the

Hamilton Enhanced US Covered Call ETF.

This is a Canadian listed ticker. Let's

keep in mind that this fund does have a

modest 25% cash leverage. It aims to be

a higher yielding alternative to the S&P

500 with similar volatility. So, I will

compare it to an S&P 500 ETF hedged to

Canadian dollars since HyLD is also

hedged. It has underperformed by 0.9%

annualized since February 2022.

HD div, the Hamilton enhanced multis

sector covered call ETF, is a portfolio

of primarily sector covered call ETFs

with a sector mix intended to be broadly

similar to the S&P TSX60. It has beaten

the S&P TSX60 as proudly proclaimed on

the fund website, but this fund has a

third of its assets invested in US

equities. To make a proper comparison, I

did my best to reconstruct an index fund

portfolio matched to the underlying

equities of HDIV. My model had no

leverage while HDIV has cash leverage of

25%. My model outperforms HD since

inception. Properly benchmark, I don't

think this fund is beating anything.

It's levering up for more downside

volatility and still underperforming.

There is an interesting discussion point

here. This fund and its underlying

equities are different from a Canadian

market index and a US market index and

they have beaten both since inception. I

would tend to say this type of

short-term performance is unlikely to

repeat in the long run. The evidence

against active management's ability to

beat the market in the long run is

absolutely overwhelming. I would

approach short-term performance like

this with extreme caution. And note that

if you believe in this specific sector

and country mix, getting exposure to it

without covered calls would be cheaper

and have higher expected returns. The

same thing goes for HHIS, the Harvest

Diversified High Income Shares ETF. It

is an equally weighted portfolio of 15

trending companies using covered calls

and 25% leverage. This fund has not been

around long and for the first few months

of its life, it only had nine holdings.

All of its holdings are single stock

covered call ETFs from Harvest. I ran

the portfolio of underlying stocks with

no leverage and no covered calls. My

waitings won't match perfectly, but I

find that the underlying stocks have

performed about the same as the fund. In

other words, you were not any better off

from the leverage and covered calls in

HHIS compared to just owning the same

stocks directly over this relatively

short period. If I allow 25% leverage

for the underlying stock portfolio, it

has outperformed HHIS significantly,

which again is exactly what we should

expect when the effects of covered calls

are isolated. Now, to be fair here, HHIS

has beaten indexes like the NASDAQ 100

and the S&P 500. But let's keep in mind

that we are talking about a fund that

has existed since January 2025, has had

as few as nine holdings, and currently

has only 15 holdings. It would be

exceptionally rare for a concentrated

portfolio of attention-grabbing stocks

like this to deliver outperformance over

an extended period of time. The vast

majority of professional active managers

underperform index funds in the long

run. I see people online putting their

faith into these products and I find it

really concerning. I honestly hope I'm

proven wrong, but at the very least, I

hope that people recognize the risk they

are taking. This is not a free lunch.

Okay, that's the full tour of

performance comparisons. Fundamentally,

a covered call changes the shape of the

distribution of expected returns in a

way that I think is detrimental to

long-term investors. And this shows up

clearly in the data. Lastly, I want to

address why I keep making videos on this

topic. I have nothing to sell you by

telling this information. If you listen

to what I'm saying in these videos,

you'll invest in lowcost total market

index funds, which I have nothing to do

with personally or professionally,

rather than high-cost covered call

funds, which I also have nothing to do

with personally or professionally. So,

why am I doing this? Understanding

complex financial products, both

analytically and psychologically, is a

huge part of my job as the chief

investment officer at PWL Capital. And I

don't know if you know this, but telling

strangers on the internet what you think

you know about something is one of the

best ways to assess and strengthen your

knowledge. I actually gain a lot from

making these videos and engaging in the

discussions that follow. More

altruistically, I want to see a

financial product marketplace in Canada

that isn't overwhelming, intimidating,

or dangerous for people who are just

starting out. The way that a lot of

financial products, not just covered

call funds, just a lot of financial

products, the way they're marketed and

sold makes it really confusing for

investors to understand what they're

buying, but also what they should be

buying. Covered calls are a particularly

challenging example because they cater

to the strong mental accounting bias

that many investors have. by providing

fundamental information and basic

performance comparisons rather than

marketing hype. I hope these videos help

a few people make better decisions or at

the very least help them ask the right

questions. Thanks for watching. I'm Ben

Felix, chief investment officer at PWL

Capital. I'm going to leave this topic

alone for a while now, but I hope that

we can keep the conversation going.